In the Electronics City business park on the outskirts of Bangalore, hundreds of construction workers are sweating on the scaffolding surrounding a half-built office block.

They must work quickly: driven by the outsourcing boom, demand for office space is so high that buildings must now be completed in ten months, rather than the usual 18. Once finished, it will house another multinational neighbour for Intel, IBM, Dell, Motorola, Yahoo, AOL and Accenture.

Over the past five years, western firms have raced to set up IT, back-office and customer service centres in Bangalore, and the infrastructure of India’s “outsourcing capital” is creaking under the pressure. The city suffers from frequent power outages, serious congestion, rising costs and an impending shortage of qualified graduates.

The story is the same in New Delhi, Mumbai, Chennai and Hyderabad, the country’s other outsourcing hubs: they cannot grow fast enough to accommodate the 40 foreigncompanies that, on average, set up business in India every month.

In an attempt to combat a potentially disastrous squeeze, the government is promoting “second-tier” cities across the country as an alternative to the established business centres.

IBM and Dell are among the multinationals leading the move to smaller cities, which are vying with each other to make room for them: Chandigarh alone has five million square feet of IT space under construction.

If the move to these “mini-Bangalores” works, India may be able to hold on to its four-fifths share of the global outsourcing market for a while. But meeting the demands of a sector that is growing by one-third every year is proving difficult country-wide.

Though still low compared to those in the west, wages are rising by 20 per cent a year and competition for employees is fierce. In any year, software services companies lose up to a third of their staff to rivals offering higher salaries and better benefits.

Foreign firms such as Hewlett-Packard, Intel and Sun Microsystems can afford to double or triple salaries offered by their Indian counterparts. “We have a problem with an internal brain drain,” says Professor M L Munjal, head of mechanical sciences at the Indian Institute of Science, which trains the country’s elite technical professionals.

“This is the price we pay for globalisation.”

The bubble is likely to burst unless India addresses its labour crisis: a recent study warns that it may lose almost half of its market share by 2007. In thecut-throat world of outsourcing, it is perpetually vulnerable to competitors.Dubai is promoting itself to higher-paid legal or medical workers who prefer the lavish Gulf lifestyle – and freedom from income and sales tax – to that of Bangalore or Mumbai.

Meanwhile countries from Hungary and the Philippines to Malaysia and China are competing for lowerend work.

As wages rise, India is even “doubleoutsourcing” business that doesn’t depend on spoken languages – such as computer programming – to engineers in China.

For the moment, however, the bulk of its business is safe from its mainrival: though cheaper, China is hamstrung by having very few Englishspeakinggraduates.

For the squabbled-over young workers powering the boom, the competition has undoubted benefits: generous salaries are creating a class of western-style consumers. But beyond wide-screen televisions and imported groceries, outsourcing is producing subtler culturalshifts.

Young, urban women with well-paid back-office jobs are becoming prized financial assets to their families, opening up the possibility of a career – rather than the usual route of immediate marriage – for thousands of female graduates.

However,independence for the few comes at a high price. Many fear that outsourcing is deepening India’s already entrenched social divisions, and that the new urban elite may be left stranded when the multinationals’ affections inevitably move to cheaper partners.